That "increase reserves to increase lending" argument is so hard to shake, but reserves can't be lent from simply from a double-entry bookkeeping point of view.

The way that accountants keep track of the "assets equals liabilities plus equity" rule is to record an increase in assets as a positive and an increase in liabilities as a negative (your liabilities rise, so a negative gets bigger). Reserves are an asset, as are loans, and shown as a positive. Deposits--which are created by a loan--are a liability and shown as a negative

So to lend to a customer, a bank has to show a negative on that customer's accounts. This can be matched by a positive on the loans entry--because the loan has increased in size. No problem.

But if banks were to lend from reserves, they would need to record a minus there--reserves have fallen. And on the liabilities side, they want to ... also show a negative. Whoops! No can do.

The end result of this logic is that reserves are there for settlement of accounts between banks, and for the government's interface with the private banking sector, but not for lending from.

Banks themselves may (if they are allowed--I simply don't know the rules here) swap those assets for other forms of assets that are income-yielding, but they are not able to lend from them.

Cheers, Steve

P.S. On my debt jubilee idea, I'd welcome a debate with you over it. There is an issue, whether you support a "strong money" gold-backed currency system or a reformed credit system, of dealing with the mess left by this one we currently have. My idea is a way to cancel the impact of debt that should never have been lent in the first place (and to prevent speculation taking off again on the other side by reforms to asset markets that make debt much less attractive).

It would be good to have a back-and-forth with you on the dilemma we're in and the alternative ways out of it, whatever our desired end-system might be.

Savings accounts have no reserve requirements. Effectively, money that people think is in their checking accounts is not really there at all. In fact, it has been lent out multiple times over.

This fact exacerbated the run-on-the-bank problems we saw in 2008. As a side note, FDIC insurance is another form of fraud.

Housing Bubble Lending

In the housing bubble, banks lent because they thought they had credit-worthy customers and/or because they thought asset price appreciation would have them covered in case of losses. Banks did not lend because they had excess reserves to lend from.

It turns out that banks did not have credit-worthy customers. It also turns out that asset prices did not cover losses when the housing bubble burst.

Some argue that as long as customers agree to these various banking schemes
it is OK. That line of thinking says as long as it's in the agreement
for banks to sweep money from checking accounts to savings accounts and
lend it out, then it's OK for banks to do so.

However, it's not
OK because such lending is nothing more than a gigantic kiting scheme.
Moreover, it affects others by cheapening the value of money, pushing up
asset prices for the benefit of those with first access to money, the
banks and the wealthy.

Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not!

Please read that above article if you have not done so. It will open your eyes as to what is happening and why.

On page 46 of the book Case Against The Fed Rothbard says "By the very nature of fractional Reserve Lending, banks cannot honor all its contracts".

Since that is known upfront, in advance, how is that not fraud?

Solutions

Before we can address solutions to the debt problem, we have to understand what caused the debt problem in the first place. In this case, FRL is at the heart of it.

Since FRL is at the heart of it, any permanent solution must address that problem.

I welcome further discussion from Steve Keen on these ideas, and I have a follow-up post in mind on student loans, showing just how distorted the system is when government gets in the way of the free market.

Regardless of what the solutions are, the notion that $1.5 trillion in excess reserves is about to come pouring into the economy 10 times over in the form of $15 trillion in new credit is complete economic silliness, a point on which Steve Keen and I are in complete agreement.

Actually, Steve and I are in agreement on many things, just not solutions.

Final Comments

I appreciate these discussions with Steve Keen. He has taught me a lot. I welcome the opportunity to present views to the public about what needs to be done. It's easy enough to tear down ideas without presenting an alternative.

I propose we start by addressing the root cause of the debt problem which I state is fractional reserve lending.

Disclaimer:The content on this site is provided as general information only and should not be taken as investment
advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security
or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this
site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated
with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that
you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your
investment adviser before making any investment decisions.